Chairman Mary L. Schapiro's opening statement before the U.S. Securities and Exchange Commission (SEC) open meeting stated that the SEC is  considering a series of proposals that would considerably bolster the regulatory framework regarding nationally recognized statistical rating organizations (NRSROs).  

The SEC is also considering a recommendation to propose a ban on the practice of flashing marketable orders. According to Schapiro's statement, flash orders offer a momentary head-start in trading that can produce inequities in the markets as well as create disincentives to display quotes.

In the open meeting, the commission considered six items aimed at creating a stronger, more robust regulatory framework. 

Specifically, these proposals would improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, as well as promoting accountability.

"These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security," Schapiro said in her opening remarks.  "That reliance did not serve them well over the last several years and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust."

She added that these changes and concepts being adopted, proposed and considered would benefit investors in various ways, including  promoting greater accountability by requiring compliance officers to file annual reports with the SEC. It will also encourage competition by enabling unsolicited ratings for structured finance products. These would also decrease the level of undue reliance on NRSROs by starting the process of  eliminating references to NRSRO ratings in certain existing rules. 

"It is time that we started this process to systematically minimize the use of ratings in the SEC’s rules and, while I know, there is much to do in this regard, I am pleased that we are taking these steps today," she said. These changes would also empower investors to make more informed decisions by facilitating the exposure rating shopping and potential revenue-linked conflicts.

Specifically, the following six items related to NRSROs are being considered by the SEC. The first is a recommendation to adopt rules to offer greater information concerning ratings histories. This allows competing credit rating agencies to provide unsolicited ratings for structured finance products, by providing access to the necessary underlying data for structured products.

The SEC is also considering amendments aimed at strengthening compliance programs by requiring annual compliance reports and enhancing disclosure of potential sources of revenue-related conflicts. There is also the recommendation to adopt amendments to SEC rules and forms to remove certain references to credit ratings by NRSROs and the suggestion to reopen the comment period to allow further comment on Commission proposals to remove references to NRSRO credit ratings from certain other rules and forms.

The SEC is also considering a proposal to require disclosure of information such as what a credit rating covers and any material limitations on the scope of the rating and whether any preliminary ratings were obtained from other rating agencies or  whether there was ratings shopping.

The commission is also looking at soliciting comment on whether it  should change SEC rules to subject NRSROs to liability when a rating is used in connection with a registered offering by removing a current provision that exempts NRSROs from being treated as experts when their ratings are used that way.

The SEC  will be considering each of these six items separately.  Following that, the SEC will take up a proposal concerning flash orders. 

 

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